Investment Planning

Question 1

Value Line

Answer 1

Ranks stocks, using a scale of 1-5:
1 being the highest ranking - BUY
5 being the lowest ranking - SELL

Question 2

Morningstar

Answer 2

Ranks mutual funds, stocks, ETFs, and Bonds using 1-5 stars:
1 being the lowest performing
5 being the highest performing

Question 3

Securities Act of 1933

Answer 3

Regulates the issuance of new securities (primary market)
Requires new issues are accompanied with a prospectus before being offered

Question 4

Securities Act of 1934

Answer 4

Regulates the secondary market and trading of securities
Created the SEC to enforce compliance with security regulations and laws

Question 5

Investment Company Act of 1940

Answer 5

Authorized the SEC to regulate investment companies
Three types of investment companies: open, closed, and unit investment trusts
Requires investment advisers to register with the SEC or state:
- Less than $100 million, register with the state
- Greater than $100 million, register with the SEC using form ADV
- Between $100 million - $110 million, choice to register with state or SEC

Question 6

Securities Investors Protection Act of 1970

Answer 6

Established the SIPC to protect investors for losses resulting form brokerage firm failures
This act does not protect investors from incompetence or bad investment decisions

Question 7

Insider Trading and Securities Fraud Enforcement Act of 1988

Answer 7

Defines an insider as anyone with information that is not available to the public
Insiders cannot trade on that information

Question 8

Monte Carlo Simulation

Answer 8

A spreadsheet simulation that gives probabilistic distribution of events occurring
Then adjusts assumptions and returns the probability of an event occurring depending upon the assumption
Allows for “what if” scenarios and sensitivity analysis if variables such as inflation or savings rate change

Question 9

Arbitrage Pricing Theory (APT)

Answer 9

A multi-factor model that attempts to explain return based on factors. Anytime a factor has a value of 0, then that factor has no impact on return.
Attempts to take advantage of pricing imbalances.
Inputs are factors (f) such as inflation, risk premium, and expected returns and their sensitivity (b) to those factors.
KEYWORDS: multi factor model, sensitivity to those factors and standard deviation and beta are not inputs

Question 10

Technical Analysis

Answer 10

Charting
Market volume
Short interest
Odd lot trading
The dow theory
Breadth of the market
Advance decline line

Question 11

Fundamental Analysis

Answer 11

Financial statement analysis through ratio analysis
Economic data such as GDP, inflation and interest rates
Provides a method for determining a securities price based on upon future cash flows

Question 12

Liquidity Preference Theory

Answer 12

Investors are willing to accept a lower yield on short term bonds because of their preference for liquidity
Results in an upward sloping yield curve (up and to the right)

Question 13

Market Segmentation Theory

Answer 13

The yield curve depends on supply and demand for bonds and various maturities
When supply is greater than demand, rates are higher to incentivize investors
When demand is greater than supply, rates are lower since issuers don’t have to pay as much to attract investment

Question 14

Expectations Theory

Answer 14

The yield curve reflects investors’ inflation expectations
When inflation is expected to be higher in the future, long term rates will be higher than short term bonds

Question 15

Best Efforts Underwriting

Answer 15

Underwriter agrees to sell as much of the offering as possible
Any shares not sold to the public are returned to the firm

Question 16

Firm Commitment Underwriting

Answer 16

Underwriter agrees to buy the entire issuance of stock from the company to sell to the public
The underwriter is at risk of not selling all of the issuance

Question 17

Prospectus

Answer 17

outlines the risks, management team, business operations, fees, and expenses
must be issued by an investment company prior to selling shares to an investor

Question 18

Red herring

Answer 18

preliminary prospectus issued before the SEC approval to determine investor interest

Question 19

Annual report

Answer 19

message from the chairman of the board on progress in the past year and outlook for the coming year
sent directly to shareholders

Question 20

10k/10q

Answer 20

10k - annual report of financial statements filed with the SEC, is audited
10q - quarterly report that is filed with the SEC, not audited

Question 21

Short Sale

Answer 21

investor profits when the asset’s price decreases
goal to sell high and buy low

Question 22

Neglected Firm effect

Answer 22

Market anomoly
The security in question is allowed greater potential for movement as a result of the lack of scrutiny by analysts

Question 23

January Effect

Answer 23

Market anomoly
January tends to be a better month because of tax loss selling in November and December followed by investors getting back into the market in January

Question 24

Small Firm Effect

Answer 24

Market anomoly
Small caps tend to outperform large caps. It’s easier for them to grow revenues and earnings faster than large cap.

Question 25

Value Line Effect

Answer 25

Market anomoly
Stocks that receive Value Line’s highest ranking (1) outperform stocks that receive the lowest ranking (5)

Question 26

P/E Effect

Answer 26

Market anomoly
Stocks with low P/E ratio tend to outperform stocks with a high P/E ratio

Question 27

Yield Curve Theories

Answer 27

Liquidity Preference Theory: the yield curve results in lower yields for shorter maturities because some investors prefer liquidity and are willing to pay for liquidity in the form of lower yields. Long term yields should be higher than short term yields because of the added risk associated with the longer maturities.

Market Segmentation Theory: the yield curve depends on supply and demand at a given maturity and there are distinct markets for given maturities with distinct buyers. When supply is greater than demand at a given maturity, rates are low (and vice versa).

Expectations Theory: the yield curve reflects investors’ inflation expectations. Since investors are uncertain/believe inflation will be higher in the future, long-term yields are higher than short term.

Question 28

The Fourth Market

Answer 28

The market where corporation and institutional investors deal directly with one another

Question 29

Preemptive Rights

Answer 29

Allow the shareholder to purchase additional shares to retain the same percent ownership they had prior the secondary offering